Sales Go Down, Stock Goes Up — the Big Story This Year Continues to Play Out

By Mitchell Clark, B.Comm. — Ahead of the Street column

The great thing about big companies is that they tend to have a lot more staying power than small enterprises. Sure, they might not be as nimble or as quick to adapt to changes in business conditions, but when big corporations are determined to ride out a storm, they often do so with flying colors. We’re seeing this now with the solid first-quarter earnings being generated by a number of Dow stocks. Long-time readers of this column will know of my affinity for following a number of “benchmark” stocks. I keep track of a number of companies on a weekly basis, but each quarter, I like to seriously analyze what my benchmarks are saying about their operations and their business climates. I advise any equity investor to do this — and you certainly don’t need to own the stock or even be interested in taking on a position. The idea is to follow, read and listen to what these companies are doing in the current economy. It’s one of the best ways to hone your market view.

One big company that’s always on the top of my list as a very meaningful benchmark is United Technologies Corporation (NYSE/UTX). Some may not be familiar with this $70.0-billion company, but it’s a huge conglomerate that owns a number of successful, brand-name businesses like Otis (elevators), Carrier (residential heating and cooling), UTC Fire Products (surveillance and alarms), Pratt & Whitney (aircraft engines), Hamilton Sundstrand (aerospace products) and Sikorsky (helicopters), among others.

Really, United Technologies is just one giant technology company with its businesses operating at the heart of consumer, corporate and government customers. With over 200,000 employees, the company was named the “Most Admired” aerospace and defense company by “Fortune” magazine in 2009.

My enthusiasm for following this company is due to the depth to which its component businesses reach into the non-automobile manufacturing economy. What this Dow stock says is important. In the first quarter this year, United Technologies reported revenues
that fell slightly, but earnings beat consensus estimates — mainly because of cost cutting. The company’s Sikorsky helicopter division is doing well on strong military orders, but its elevator and HVAC businesses are struggling to grow. The company’s two aerospace businesses also saw their revenues fall as compared to the first quarter last year.

So, it’s pretty clear that things still aren’t all that rosy in the real industrial economy. However, even with slightly declining sales, the company was able to grow its earnings, and this is why the stock has been so strong this year

United Technologies is the perfect example of why a large-cap stock can do great when its business isn’t growing. Big corporations can’t control their revenue growth, but they can squeeze every expense to pad the bottom line. So, while sales fell slightly, earnings increased, and investors lived happily ever after. It’s the simple truth for many large-cap companies, and it’s why large-caps will be the big story this year.